This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

14 December 2009

Market Adaptation to Climate Imperatives

While the politicians in Copehagen argue about pennies in aid to help poor countries adapt to climate change, the big boys in private industry are finally starting to move. There has been far too little press—let alone analysis—of the trends and implications, but they are profound and encouraging.

The reason is simple. Private industry commands far more resources and (once it sees the need and a path to profit) can act far more swiftly than government. Private industry doesn’t have to contend with idiots like John Boehner, at least not in its internal decision making.

After years of denial and foot dragging, the titans of private industry are finally getting smart. The best of them see huge opportunities for innovation and profit in helping to solve the problem of human-induced climate change. And the amounts they are beginning to invest make the subjects of heated debate in Copenhagen seem like table scraps at a banquet.

Let’s take two examples. To help assuage the “South’s” demands for money to fight the effects of climate change, Energy Secretary Steven Chu proudly announced that industrialized countries would spend $350 million over five years—$85 million of it coming from the United States—to spread renewable and nonpolluting energy technology in developing countries. Meanwhile, ExxonMobil has allotted nearly twice as much, $600 million, to develop a single new “green” technology: using algae to grow carbon-neutral biofuels.

As a second example, the EU pledged last Friday “to pay $3.5 billion annually for three years to help poor countries cope [with climate change]—though economists project the total cost to be $100 billion or more.” Meanwhile, ExxonMobil today committed nearly three times as much, $31 billion in stock, to buy XTO Energy, the leading U.S. producer of shale gas.

The deal announced today is notable for several reasons. First, it is an enormously shrewd business deal. The company ExxonMobil is buying (XTO) controls [subscription required] 13.9 trillion cubic feet of natural gas-equivalent reserves. At the current market price of $5.33 per thousand cubic feet, those reserves have a market value of about $74 billion.

Not only that. Geopolitical and demographic trends suggest that the current glut of gas resources will not last long, and the value of those reserves will increase substantially with time. With a factor-of-2.5 allowance for “engineering error” even at current prices, ExxonMobil’s energy engineers have done quite well for themselves.

The deal is also notable for its potential for improving our national energy security, alleviating the worst environmental effects of fossil fuels, and retarding climate change. These points require some explanation.

Many of the biggest recent discoveries of shale gas are right here in the United States; others are in Canada. These discoveries have produced a “glut” of new gas that has depressed retail prices by more than a factor of two from as little at two years ago. Producers without much imagination saw little benefit in acquiring reserves of a commodity sinking in price. But ExxonMobil’s current leaders had more imagination.

Natural gas is a multi-use energy source almost as versatile as electricity. Right now, its predominant use is heating homes and businesses. But we can also use natural gas to generate electricity efficiently. California has done so in most, if not all, of the new power plants built there over the last two decades. Finally, natural gas can power internal combustion engines for cars and trucks with little modification. Many major cities already have working municipal fleets of natural-gas-powered buses and trucks.

All this is nice, but what about pollution and global warming? Here, too, natural gas shines. Its combustion produces virtually none of the particulates and hydrocarbon smog that burning gasoline does. Unlike coal, it has no sulfur or mercury to poison our air and indirectly our watersheds and oceans. As for global warming, burning natural gas produces about one-half the carbon dioxide per unit of energy that burning coal does. That’s why California, our most environmentally sensitive state, uses so much of it.

Finally, natural gas is a much better candidate for carbon sequestration than is coal. Sequestering carbon dioxide from coal requires putting gaseous carbon dioxide, at high pressure, into empty underground reservoirs that used to contain coal, tar sands or oil. You don’t have to be a physicist or petroleum engineer to understand the problems of replacing a solid or liquid with a gas.

But natural gas is a gas just like the carbon dioxide that comes from burning it. Furthermore, methane (CH4), which is the principal component of natural gas, has atomic weight 16, as compared to carbon dioxide’s 44. In short, CO2 is nearly three times as heavy as methane. CO2 ought to “settle out” on the bottom when mixed with methane, at least when the mixing is gentle. So there may be ways to pull natural gas out of one end or level of an underground reservoir while sinking CO2 into the other. At least the physics suggests that doing so will be a far easier task with natural gas than with coal or oil sands.

This analysis suggests that natural gas will make a far better interim fuel than coal for our transition to an electric energy infrastructure powered primarily by clean wind, solar and nuclear energy. We have plenty of natural gas on our own continent, so we needn’t worry about supply disruptions, geopolitical risk, or supporting despotic regimes or terrorists. Natural gas avoids all the worst problems of coal pollution, including particulates, acid rain, and the mercury pollution that poisons sushi (among many other things). It’s far from carbon neutral, but it’s twice as good as coal.

Coal is the worst fuel known to man. It seems cheap only when we ignore the horrendous external costs of pollution, land spoliation, and global warming that mining and burning it create.

As cap & trade policy becomes a reality both here and abroad, it will price in these real (and exponentially growing) bad effects of burning coal, and coal will no longer seem so economical. The resulting “fully loaded” pricing will reveal how obsolete this nineteenth-century anachronism is. Full use of natural gas, including for electric-power generation and transportation, can help us reach that desirable state more quickly.

As another underreported example of what industry can do, consider Bolivia. As the New York Times just reported, its glaciers are drying up and, with them, Bolivia’s water supply. So Bolivia sees itself as a mendicant, bidding for its fair share of largesse from rich nations, both to alleviate its endemic poverty and to help combat the already drastic effects of climate change.

But Bolivia is sitting on one of the world’s most valuable energy-strategic resources: the world’s largest and least exploited deposits of lithium. Evo Morales has something better than a gold mine—a mine of minerals that could lead to a nonpolluting, carbon-neutral global energy infrastructure. How Morales handles that natural bonanza will determine both the future of his poverty-stricken country and the speed of global adaptation to climate change.

Morales has two options. The first is to nationalize the lithium fields, which are now owned partly by a publicly-traded Chilean company, Sociedad Quimica y Minera, S.A.. (Don’t rush to buy the shares. They’re already trading at a P/E of 28, close to Apple’s but without Apple’s freedom from geopolitical risk.) The second is to allow foreign firms to exploit the resource, perhaps in joint ventures with non-controlling Bolivian government participation and appropriate taxation of expatriated lithium.

The worst option would be nationalization, as neighboring Venezuela’s oil experience has shown. Nationalization, even in part, scares away private capital like ExxonMobil’s. It also scares away the best mining engineers, who prefer to work for market-based private companies that deal in dollar and cents, not politics.

Morales would do much better by following the Saudi example. Saudi Arabia has succeeded in exploiting its oil reserves to capture a large fraction of the developed world’s wealth. It has done so primarily by inviting foreign companies in and learning from them. It has also learned to “tax” oil by taking a reasonable share of production, part of which it sells on the global market for cash, and part of which it uses for its own internal needs.

Figuring out how to do this all successfully requires real brains, in particular economic brains. If Morales has any sense, he should be quietly scouring the Spanish-speaking world for the best mining and petroleum economists and engineers and putting them on his payroll. How well he does this job will determine not only Bolivia’s economic future, but much of the rest of the world’s.

Free markets are indeed powerful forces. As recently as two years ago, Exxon’s former CEO (Lee Raymond)—although a successful petroleum engineer—was a consummate climate-change denier. Now he is gone, replaced by men (including present CEO Rex Tillerson) who understand the enormous opportunities that grappling with climate change presents.

The Chinese are ahead of us in understanding. Their very language reveals an essential truth: the word “crisis” in Chinese consists of the two characters for “danger” and “opportunity.” If the world’s industry and Evo Morales could achieve similar insight, human adaptation to climate imperatives might proceed much faster than anyone now expects.

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About Me

This blog reflects a quarter century of study and forty years of careers in science/engineering (7 years), law practice (8 years) and law teaching (25 years). A short bio and legal publication list appear here. My pre-retirement 2010 CV appears here.
As I get older, I find myself thinking more like an engineer and less like a lawyer or law professor. Our “advocacy” professions—law, politics, public relations and advertising—train people to take a predetermined position and support it against all opposition. That’s not the best way to make things work—which is what engineers do.
What gets me up in the morning is figuring out how things work and how to make them work better, whether they be vehicles, energy systems, governments or nations.
This post explains my respect for math and why you’ll find lots of tables and a few graphs and equations on this blog. If you like that way of thinking, this blog is for you.